Table Of Content

REVIEW OF THE COMMODITY FUTURES TRADING COMMISSION'S DISCRETION TO EXEMPT CERTAIN TRANSACTIONS FROM ANTIFRAUD PROVISIONS OF THE COMMODITY EXCHANGE ACT Y 4. AG 8/1:103-13 Revieu of the Connodity Futures Tri... xxx^nRINGS BEFORE THE SUBCOMMITTEE ON ENVIRONMENT, CREDIT, AND RURAL DEVELOPMENT OF THE COMMITTEE ON AGRICULTURE HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS FIRST SESSION ON H.R. 2374 TO AMEND THE COMMODITY EXCHANGE ACT TO ENSURE THE CONTIN- UED APPLICATION OF THE ACT'S ANTIFRAUD AND ANTIMANIPULATION PROTECTIONS APRIL 28 AND JUNE 30, 1993 Serial No. 103-13 Printed for the use of the Committee on Agriculture U.S. GOVERNMENT PRINTING OFFICE 72-584 WASHINGTON : 1993 ForsalebytheU.S.GovemmentPrintingOffice SuperintendentofDocuments.CongressionalSalesOffice,Washington.DC 20402 ISBN 0-16-041700-7 REVIEW OF THE COMMODIH FUTURES TRADING COMMISSION'S DISCRETION TO EXEMPT CERTAIN TRANSACTIONS FROM ANTIFRAUD PROVISIONS OF THE COMMODITY EXCHANGE ACT Y 4. AS 8/1:103-13 Revieu of the Connodity Futures Tra. ,riRINGS BEFORE THE SUBCOMMITTEE ON ENVIRONMENT, CREDIT, AND RURAL DEVELOPMENT OF THE COMMITTEE ON AGRICULTURE HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS FIRST SESSION ON H.R. 2374 TO AMEND THE COMMODITY EXCHANGE ACT TO ENSURE THE CONTIN- UED APPLICATION OF THE ACT'S ANTIFRAUD AND ANTIMANIPULATION PROTECTIONS APRIL 28 AND JUNE 30, 1993 Serial No. 103-13/^,^^, 139^ Printed for the use of the Committee on Agriculture U.S. GOVERNMENT PRINTING OFFICE 72-584 WASHINGTON : 1993 ForsalebytheU.S.GovernmentPrintingOlTice SuperintendentofDocuments,CongressionalSalesOffice.Washington.DC 20402 ISBN 0-16-041700-7 COMMITTEE ON AGRICULTURE E (KIKA) DE LA GARZA, Texas, Chairman GEORGE E. BROWN, Jr., California, PAT ROBERTS, Kansas, Vice Chairman Ranking Minority Member CHARLIE ROSE, North Carolina BILL EMERSON, Missouri GLENN ENGLISH, Oklahoma STEVE GUNDERSON, Wisconsin DAN GLICKMAN, Kansas TOM LEWIS, Florida CHARLES W. STENHOLM, Texas ROBERT F. (BOB) SMITH, Oregon HAROLD L. VOLKMER, Missouri LARRY COMBEST, Texas TIMOTHYJ. PENNY, Minnesota WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota BILL BARRETT, Nebraska BILL SARPALIUS, Texas JIM NUSSLE, Iowa JILL L. LONG, Indiana JOHN A. BOEHNER, Ohio GARYA. CONDIT, California THOMAS W. EWING, Ilhnois COLLIN C. PETERSON, Minnesota JOHN T. DOOLITTLE, California CALVIN M. DOOLEY, California JACK KINGSTON, Georgia EVA M. CLAYTON, North Carolina BOB GOODLATTE, Virginia DAVID MINGE, Minnesota JAY DICKEY, Arkansas EARL F. HILLIARD, Alabama RICHARD W. POMBO, California JAY INSLEE, Washington CHARLES T. CANADY, Florida THOMAS J. BARLOW III, Kentucky NICK SMITH, Michigan EARL POMEROY, North Dakota TERRY EVERETT, Alabama TIM HOLDEN, Pennsylvania CYNTHIA A. McKINNEY, Georgia SCOTTY BAESLER, Kentucky KAREN L. THURMAN, Florida SANFORD D. BISHOP, Jr., Georgia BENNIE G. THOMPSON, Mississippi SAM FARR, California PAT WILLIAMS, Montana BLANCHE M. LAMBERT, Arkansas Professional Staff DiANNE Powell, StaffDirector Vernie Hubert, ChiefCounsel and Legislative Director Gary R. Mitchell, Minority StaffDirector James A. Davis, Press Secretary Subcommittee on Environment, Credit, and Rural Development GLENN ENGLISH, Oklahoma, Chairman TIM JOHNSON, South Dakota. LARRY COMBEST, Texas Vice Chairman STEVE GUNDERSON, Wisconsin JILL L. LONG, Indiana WAYNE ALLARD, Colorado EVA M. CLAYTON, North Carolina BILL BARRETT, Nebraska DAVID MINGE, Minnesota JIM NUSSLE, Iowa THOMAS J. BARLOW III, Kentucky THOMAS W. EWING, Illinois EARL POMEROY, North Dakota JAY DICKEY, Arkansas TIM HOLDEN, Pennsylvania RICHARD W. POMBO, CaUfomia CYNTHIAA. McKINNEY, Georgia NICK SMITH, Michigan KAREN L. THURMAN, Florida TIMOTHY J. PENNY, Minnesota BILL SARPALIUS, Texas COLLIN C. PETERSON, Minnesota EARL F. HILLIARD, Alabama JAY INSLEE, Washington SCOTTY BAESLER, Kentucky BENNIE G. THOMPSON, Mississippi SAM FARR, CaUfomia (ID CONTENTS April 28, 1993 Page Combest, Hon. Larry, a Representative in Congress from the State ofTexas, openingstatement 9 English, Hon. Glenn, a Representative in Congress from the State of Okla- homa, openingstatement 1 Prepared statement 4 Witnesses Albrecht, William P., Acting Chairman, CommodityFutures TradingCommis- sion 9 Prepared statement 46 Bair, Sheila C, Commissioner, Commodity Futures TradingCommission 11 Prepared statement 67 Dial,Joseph B., Commissioner, Commodity Futures TradingCommission 15 Prepared statement 80 Submitted Material Corcoran, Andrea M., Division ofTrading and Markets, Commodity Futures Trading Commission, memorandum ofApril 9, 1993 85 Implementationofthe Futures Trading PracticesActof1992 87 June 30, 1993 H.R. 2374, a bill to amend the Commodity Exchange Act to ensure the continued application of the act's antifraud and antimanipulation protections 94 Reportfrom CommodityFutures TradingCommission 96 Combest, Hon. Larry, a Representative in Congress from the State ofTexas, prepared statement 92 English, Hon. Glenn, a Representative in Congress from the State of Okla- homa, openingstatement 89 Farr, Hon. Sam, a Representative in Congress from the State of California, prepared statement 91 Witnesses Arbor, PatrickH., chairman, Chicago Board ofTrade 110 Prepared statement 134 Klein, R. Wayne, chief, securities bureau. State ofIdaho, on behalfofthe North American Securities AdministratorsAssociation, Inc 113 Prepared statement 143 Raisler, Kenneth M., attorney, on behalfofthe Energy Group 121 Prepared statement 165 Submitted Material Albrecht, William P., acting chairman, Commodity Futures Trading Commis- sion, statement 97 Bair, Sheila C, Commissioner, Commodity Futures Trading Commission, statement 102 Bauman, Joseph, chairman. International Swaps and Derivatives Association, letterofJune 30, 1993 177 Dial, Joseph B., Commissioner, Commodity Futures Trading Commission, statement 106 Redel, Donna, chairman. Commodity Exchange, Inc., letterofJune 28, 1993 .. 180 (III) REVIEW OF THE COMMODITY FUTURES TRADING COMMISSION'S DISCRETION TO EXEMPT CERTAIN TRANSACTIONS FROM ANTIFRAUD PROVISIONS OF THE COMMOD- ITY EXCHANGE ACT WEDNESDAY, APRIL 28, 1993 House of Representatives, Subcommittee on Environment, Credit, AND Rural Development, Committee on Agriculture, Washington, DC. The subcommittee met, pursuant to notice, at 10:05 a.m., in room 1300, Longworth House Office Building, Hon. Glenn English (chairman ofthe subcommittee) presiding. Present: Representatives Long, Barlow, Holden, Combest, Gun- derson, Allard, Nussle, and Ewing. Also present: Representative E (Kika) de la Garza, chairman of the committee. Staff present: Vemie Hubert, chief counsel and legislative director; Fred J. Clark, deputy chief counsel; John E. Hogan, minority counsel; Glenda L. Temple, clerk; Benjamin L Baker, James E. McDonald, James A. Davis, John Riley, and David Ebersole. OPENING STATEMENT OF HON. GLENN ENGLISH, A REP- RESENTATIVE IN CONGRESS FROM THE STATE OF OKLA- HOMA Mr. English. The hearing will now come to order. Last year with the reauthorization of the Commodity Futures Trading Commission, the Congress wrestled with a very difficult issue of what we do pertaining to the so-called "derivatives." Our concern was that this was an issue in which we were not prepared to ma—ke a decision, and as such, we had requested that studies be done studies that paralleled a study already underway by the General Accounting Office. We requested the Securities and Exchange Commission, as well as the Federal Reserve and CFTC, to carry out studies pertaining to these derivatives, and we also pointed out that we did not want any action taken beyond maintaining the status quo. This was a decision that the Congress was reserving for itself, as to what should be done. The Congress has not yet reached that point, or reached that decision. In maintaining that status quo, the Congress did grant authority to the CFTC to make sure that the courts did not act in preempt- (1) ing this decision, but it was made very clear that this was the decision to maintain the status quo only, not go beyond that point. And at the time, I believe, I made the statement to the con- ference that as far as I was concerned, should action go beyond maintaining the status quo, that those who were involved would have the opportunity to explain their decision to this subcommittee, and it appears that that's where we are. The so-called Brent Oil decision was thejudgment that we recognized needed to be addressed. We recognized that there was the danger of the courts acting, and that it would also cause difficulty as far as the oil markets are concerned. We had, in fact, instructed the CFTC to take whatever actions necessary to maintain the status quo at that time. There was a request made in November, with regard to exemp- tions. Those r—equests were considered by the CFTC, and from wha—t I understand ifI'm in error, we'll let the Commission correct me that the former chairman then provided to the Federal Register a for a rule that had not even been considered or looked at Eryotphoesaolther Commissioners, from what I understand. It is disturbing then that earlier this month, we found newspaper headlines which told us that the former chairman, shortly after the publishing of that proposal in the Federal Register, joined one of the very companies, who in November came before the Commis- sion. It is my understanding then that the action taken by the Com- mission earlier this month was along those lines, and went beyond simply maintaining the status quo. For the first time, we have a regulatory body that exempts those that they're regulating from fi*aud statutes, and while there is an inclusion of antimanipulation, there's a question as to whether or not it applies —to the instruments that are being considered, since under the law particular provisions under the law for manipula- tion apply to futures contracts. We also find that this is a Commission that does not have a full compliment of members, and this was a two to one decision. I did note with interest that the only attorney on the Commission voted against it. I also have taken note ofthe fact that we have a memorandum to the files dated April 8 of this year, from the Director of the Division of Trading and Marketing, voicing concerns about this particular provision, and particularly the antifi'aud provisions. We—also have another memo to the Director ofthe Economic—Divi- sion fi*om the Director of the Division on Enforcement who voiced his concerns with regard—to this action. It was noted by all three of those who I mentioned the Director of Trading and Mar- keting, the Director o—f the Division on Economic Analysis, as well as the Commissioner that the purpose of the legislation last year was to take us beyond an "all or nothing" position to not require the Commission to view each decision on that basis, and that this exceeded and went beyond what was intended, and I don't think there's any question about that. At n—o time during the discussion of the reauthorization of the CFTC— certainly in the House, and I don't believe, in the other body did we ever have any Member who raised the question or the wisdom of excluding any contract fi*om fi-aud statutes of the Federal Government or the regulatory body involved, and as was pointed out by the Director ofthe Division ofTrading and Market- ing, "To my knowledge, the Commission has never before exempted transactions in products subject to its jurisdiction from the antifraud provisions ofthe act, unless another regulatory regime clear- ly applied to such transactions." What is more disturbing is that this action by the Commission may go beyond simply Federal law, and again, I quote the Director in pointing out that, "In this case, the energy contracts exempted from the CEA would also be exempt from State antibucketing laws, and to the extent that they are not investment contracts or securities, or can be so designed, it would be exempt from security laws as well." I know that we will be provided with an explanation as to why it was necessary to take this action, and I have to say that I, for one, have been Einxiously looking forward to the explanation. [The prepared statement ofMr. English follows:] STATEMENT OF CONGRESSMAN GLENN ENGLISH, CHAIRMAN SUBCOMMITTEE ON ENVIRONMENT, CREDIT AND RURAL DEVELOPMENT OVERSIGHT HEARING ON AN ORDER OF THE THE COMMODITY FUTURES TRADING COMMISSION EXEMPTING CERTAIN ENERGY CONTRACT FROM PROVISIONS OF THE COMMODITY EXCHANGE ACT April 28, 1993 Today the Subcommittee is holding an oversight hearing to review an order issued by the Commodity Futures Trading Commission on April 13, 1993, that exempted certain energy contracts from most of the provisions of the Commodity Exchange Act, including the Act's anti-fraud provisions. The Commission's order was issued under an amendment to the Act enacted in,the Futures Trading Practices Act of 1992 that added an new section 4(c). Section 4(c) authorizes the Commission to "exempt any agreement, contract, or transaction. . .either unconditionally or on stated terms or conditions. ..from any of the requirements of...subsection (a), or from any other provision of the Act...if the Commission determines that exemption would be consistent with the public interest." The exemptive authority was granted to the Commission to enable it to provide legal certainty to a number of existing categories of instruments that have elements of futures contracts but do not trade on the regulated futures exchanges. The legal status of some of these contracts, including the 15-day Brent Oil